Korea e-commerce: Appetite for disruption

Coupang has become accustomed to landmarks. The Korean e-commerce company achieved $1 billion in annual gross merchandise value (GMV) within three years of launch, supposedly faster than any other firm globally.

GMV is rising 80% year-on-year and the firm has an annualized revenue run rate of $3 billion. As sales have grown so has Coupang's valuation. In May 2014 Sequoia Capital invested at a valuation of more than $1 billion. Six months later BlackRock Private Equity Partners came in at $2 billion. And last week SoftBank Corp. committed $1 billion, valuing the business at $5 billion.

To some industry participants, Coupang still represents an attractive proposition. John Nahm, managing director at Strong Ventures, notes that Amazon has a market capitalization just over twice its 2014 net sales. For Chinese e-commerce giants Alibaba Group and JD.com, these multiples are 18x and 2.7x. For Coupang, it's 1.7x.

"Korean e-commerce companies are still undervalued so there is a lot of upside," says Nahm, an investor in Coupang. "There is also a lot of disruption and the traditional retailers will be negatively affected. You already see people go to shopping malls, find what they want to buy, and then they shop for it via their mobile."

Capital is being drawn to this disruption, making early investors very rich on paper. But the arms race taking place in e-commerce also poses questions as to how and where venture capital firms should address the industry.

Capital and competition

While market leader Coupang has raised $1.5 billion in the past year, last month, KKR and Anchor Equity Partners agreed to buy a 46% stake in number two player Ticket Monster from Groupon for $360 million. Wemakeprice - the third major mobile-oriented start-up to graduate from Groupon-style daily deals to e-commerce - is bankrolled by its wealthy founder and has yet to receive third-party equity funding.

They face competition from eBay's Gmarket and Auction services and also from traditional retailers looking to go digital. However, the combination of a head-start in mobile commerce and the slow movement of conglomerates have created a reasonably defensible position.

"Let's say you are in a $10 billion offline company and your online business is less than $100 million. You are trying to cannibalize your offline stores, while the CEO has to meet his numbers. Systematically trying to innovate from within a company is always tough," says Han Kim, general partner and co-founder of Altos Ventures, another Coupang investor.

Overall retail sales in Korea have risen 17.3% over the last four years to reach KRW359.7 trillion in 2014. Large discount stores, gas stations and "retail sales not in stores" are the main growth drivers. Online sales came to KRW45.3 trillion last year, up 80% from 2010. Nearly two thirds of sales were generated by online-only malls.

A source familiar with the Ticket Monster deal - announced not 18 months after Groupon bought the business - says the US-listed company recognized the investment required in the business would have a greater-than-anticipated impact on its financials. Yet Coupang has by all accounts hardly touched its $1.5 billion. E-commerce companies in Korea generally have not reached the spending levels seen in the US.

The bulk of Sequoia's $100 million round was earmarked for logistics: warehouses, truck fleets, and "Coupang men" to handle last-mile delivery. It is likely that more funding will be channeled in this direction. Han sees the company's desire to provide an end-to-end fulfillment service is a key differentiator from its industry peers.

"Customers have a very satisfying experience receiving products on time - people are courteous, properly dressed - and there is certainly a lot more trust among women," he says. "There are third-party delivery guys and Coupang still uses them but they are run to keep costs as low as possible. Less attention is paid to customer service."

Where next?

Given the competitive nature of the industry and the expectation of rising capital needs, VC investors are looking for niches in and around the e-commerce space. They focus on specialist fashion and beauty verticals, food and beverage, and travel, which between them accounted for roughly half of online spending in 2014.

However, marketing and delivering goods is only part of the puzzle. Established players worry about competitors arriving with new technologies, but payment systems require more immediate reform. The chief concern are regulatory obstacles that make it difficult for online retailers to retain credit card information, which means details must be entered afresh for every purchase through a single platform.

Ticket Monster has introduced a function to address this problem and start-ups are expected to proliferate in the space. While data verification may remain the preserve of government-authorized groups, there is the potential for services that facilitate payments. Altos has backed one company that enables money to be transferred smoothly between accounts, while L&S Venture Capital is looking at areas such as proximity payment systems and financial security.

"Payment is the big bottleneck - regulatory issues need to be resolved," says Jason Lee, managing director at L&S. "It is very hard for companies to retain credit card information and that is why the Apple model doesn't work here."

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• Topics
• Technology
• Consumer
• North Asia
• Expansion
• TMT
• Consumer
• South Korea
• Growth capital
• Softbank
• BlackRock
• Sequoia Capital
• Altos Ventures